Standard Bank has launched platinum commodity warrants to retail investors and will soon be launching commodity warrants on gold and oil.
These commodity based warrants allow you to trade your view on both the price of the underlying commodity and the rand/dollar rate; but be warned it is not for newbies. Although, unlike single stock futures, you cannot lose more than you invested, you can still lose everything you put in.
These commodity warrants are exceptionally volatile as they are rand based so they track the rand price of platinum which means you are exposed to both movements in the commodity price as well as the rand. As gold pundits will tell you, even if the commodity price soars, if the rand strenghtens, you can still lose money.
How it works
Warrants allow investors to put down a relatively small deposit yet have exposure to the full value of the underlying asset. This means that a small change in the price of the underlying commodity or exchange rate will result in a greater change in the value of the warrant.
You pay a premium for the right to buy the commodity at a set price in the future (although in the case of commodity warrants you will never actually land up with an ounce of platinum as it will be settled in cash).
For example if you believe that the rand platinum price will rise, you would buy a warrant which would give you the right to purchase platinum at R15 000 per ounce in January (strike price).
Currently one platinum warrant is trading at 20c and 3 000 warrants would give you exposure to one ounce of platinum. If you do the maths that means for every one ounce of platimum you are paying a R600 premium.
If in January, when the warrant expires, the rand price for platinum is R15 000, you would actually have lost R600. The rand price would have to be more than R600 above the strike price to make money.
However, as Brett Duncan, the Director of Equity Derivatives at Standard Bank explains, warrants are not instruments you buy and hold but rather trade with a view to few days a couple of weeks.
For example, the platinum price is currently trading at $1 532 multiplied by a rand/dollar rate of R7,60 gives you a rand price of R11 643.
Later this week the platinum price rises to $1 600 and the rand weakens to R8/$, the rand platinum price rises to R12 800 and the warrant’s value would rise from 20c to 30c, which means you would make a 10c profit per warrant if you sold.
Of course if the platinum price falls and the rand strengthens your warrant price would also fall.
As the warrant nears its expiry date and it is trading near or below the strike price, the warrant will further decrease in value until it is worthless.
This is known as price decay or theta. Traders have a saying ‘theta, theta, profit-eater”. Duncan warns that if you have not traded warrants before you need to educate yourself first, so before you trade check out www.warrants.co.za.
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